Negative US Equity Returns Over the Next Decade

In a recent post, I referenced Mark Hulbert's article for MarketWatch that suggested the "Stock market is doomed to rise only 3.5% per year over the next decade."  That may be wishful thinking.

Jesse Felder's recent column titled "The Warren Buffett way to avoiding major bear markets" suggests that US equities are expected to earn a return of only -1.07% over the next ten years!

Felder's analysis begins with Warren Buffett's market cap to GNP ratio, which he uses as the independent or explanatory variable in a model to forecast US equity returns over the subsequent ten-year period. The fit is remarkably accurate for a ten-year return forecast. Felder then compares the US equity return forecast to the yield of the 10-year UST note to determine whether stocks or bonds are more attractive.

Here is Felder's analysis of the current data:

"What I think is most remarkable about the chart above right now is, at 3.05% (stocks’ forecast return of -1.07% minus a 10-year bond yield of 1.98%), it is signaling one of the largest spreads between forward returns on record. There are only a handful of quarters over the past fifty years that offered investors a better opportunity to switch from stocks to bonds. In fact, the last time the spread was this wide was during the second and third quarters of 2007, just prior to the financial crisis that led to a 50% drop in the stock market."

Two different fundamentally-sound analyses both conclude that US equity returns over the next decade will be near zero, and could even be negative. If your investment portfolio is heavily dependent on US equity returns, it may be time to explore other sources of return.

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About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years. I have also written four books on options and derivative strategies.
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One Response to Negative US Equity Returns Over the Next Decade

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